Corrects capacity of Inter Pipeline PP unit in third paragraph.
US polypropylene (PP) margins could narrow further in 2023 as new capacity ramps up even as demand is expected to remain weak.
PP margins in 2022 have fallen by around 9¢/lb through November, with more expected to come out in December, as the market has contended with elevated producer inventories, weak demand, and limited export opportunities due to logistics challenges for much of the second half of the year. PP prices are typically discussed on a monomer-plus basis, so anything on top of the polymer grade propylene (PGP) price is the PP producer's margin.
The market has already seen limited supply impact from Inter Pipeline's new 525,000 t/yr PP unit in Alberta, Canada, which came online in July 2022. But that unit has not been running at full rates as it awaits the full startup of the adjoining propane dehydrogenation (PDH) unit, expected by the end of this year. Additionally, ExxonMobil's new 450,000 t/yr PP unit in Baton Rouge, Louisiana, started up in early December. However, the full impact of that new production is not expected to be felt until late in the first quarter or early in the second quarter of 2023, as the unit is expected to take some time to work through its entire product wheel before it can achieve higher operating rates.
But once the two units begin running at steady levels, market participants have suggested the market could quickly become oversupplied.
"Everyone is going to have resin to offer. We will find resin under the rocks in our garden," joked one trader. "It's going to be everywhere."
That abundance of new resin, combined with expectations for continuing weak demand in the early part of 2023, has some market participants expecting that PP margins could fall by as much as another 8-10¢/lb by the end of 2023.
While some producers and even some buyers are optimistic that domestic demand will rebound early in the first quarter as buyers are forced to rebuild their inventories, plenty are still worried about economic conditions and the possibility of a potential recession that would erode PP demand.
"The economy is in tough shape," one buyer said. "Some people are saying things will turn around quickly, but I don't think consumer spending will be good for the majority of next year."
The uncertainty has left buyers more cautious in their approach to negotiations for 2023 contracts. In a typical year, contracts are signed in the last two months of the preceding year. But this year, contract negotiations are expected to extend into early 2023, as buyers seek to leverage the increased competition for better pricing.
Multiple buyers have said they anticipate contracting for less volume in 2023 so they have the option to purchase more spot volumes.
Imports from overseas are not expected to be as much of a factor in 2023 as they were in late 2021 or mid-2022, as domestic buyers look to the new capacity to more than meet their requirements. Exports from the US, however, are expected to play a bigger role, with producers needing the export market as a relief valve to prevent inventories from building up too high.
If domestic demand does not improve, and producers are not able to export as much as they need, some market participants have suggested that capacity rationalization could take place, with some of the oldest and least efficient units shutting down.
